Mortgage Fraud Need-to-Knows

What Mortgage Fraud Is—and How to Avoid It

Mortgage fraud involves lying or omitting information to fund or insure a mortgage loan. It results in billions of dollars in annual losses nationwide. In the second quarter of 2023, 0.75% of all mortgage applications were estimated to contain fraud, which is about 1 in 134 applications, according to CoreLogic. Rates of fraud were higher for two- to four-family properties than for single-family homes. The top states for mortgage application fraud in 2023 were New York and Florida.

What Is Mortgage Fraud?

The FBI, which investigates mortgage fraud, defines it as “a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.” A borrower might apply for a loan saying they had received a gift of money to help purchase a home when in reality, the borrower simply used money borrowed from a family member to temporarily inflate their assets during the loan application process.

Sometimes those working in the mortgage industry are the fraudsters: In one recent case, employees of a New Jersey mortgage business misled lenders about the intended use of properties to fraudulently secure lower mortgage interest rates. They often submitted loan applications saying that borrowers would reside in a property when in fact the property was being used as a rental or investment property.

How Does Mortgage Fraud Happen?

Mortgage fraud happens when someone involved in the process of obtaining a loan for a property purchase makes false statements about their financial situation or the planned use of the property. It may involve falsifying documents, lying about the source of income, or even creating an entirely false identity.

Types of Mortgage Fraud

The FBI investigates two distinct areas of mortgage fraud: fraud for profit and mortgage fraud schemes used for housing.

Fraud for Profit

The FBI says that those who commit this type of mortgage fraud are often industry insiders. Current investigations and reporting indicate that a high percentage of mortgage fraud involves collusion by bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals in the industry. The FBI points out that fraud for profit is not about getting a home, but manipulating the mortgage process to steal cash and equity from lenders and homeowners.

Fraud for Housing

It’s not only industry insiders who can look to milk the system with mortgage scams. With fraud for housing, the perpetrators are borrowers who take illegal actions in order to acquire or maintain ownership of a house. They could do this by lying about income or presenting false information about assets on their loan application to get a good mortgage rate, for example. One area where fraud is on the increase in recent years is occupancy misrepresentation, in which an investor claims that an investment property is their primary residence in order to get a more favorable mortgage rate.


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

First-time homebuyers can
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with as little as 3% down.

Questions? Call (888)-541-0398.


What Are the Penalties for Mortgage Fraud?

Mortgage fraud schemes abound, and mortgage fraud is serious. In fact, it’s typically a felony. It’s usually the FBI who investigates mortgage fraud, and conviction for federal mortgage fraud can result in a federal prison sentence of 30 years; state convictions can last a few years. If the crime is a misdemeanor and the amount involved is less than $1,000, there can be a one-year sentence.

A conviction on a single count of federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor to $100,000 or more for a felony. Those found guilty can expect to pay restitution to compensate the victims and to be on probation following jail time.

9 Main Types of Mortgage Fraud

Mortgage fraud comes in many flavors so let’s get a closer look at exactly what is mortgage fraud. Scammers are big on creativity, particularly when it comes to scams targeting seniors. The FBI has a list of common mortgage fraud schemes and scams to watch out for. Here are a few of theirs and others to keep in mind.

1. Property Flipping

There’s nothing innately evil about flipping properties. In fact, adding investment properties to your portfolio can be a way to build wealth if you’re good at it. But then there’s the sinister side of flipping. It goes something like this: A property is purchased below the market price and immediately sold for profit, typically with the help of a shady appraiser who puffs up the value of the property. This is illegal.

2. Equity Skimming

The FBI explains how this works: An investor may use a “straw buyer” (a knowing accomplice), false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer signs the property over to the investor in a quit-claim deed, which relinquishes all rights to the property and provides no guarantee to title. The investor does not make any mortgage payments and rents out the property until foreclosure takes place several months later.

3. Asset Rental

It’s one thing to borrow something blue on your wedding day, and quite another to borrow or rent the assets of your best friend or loved one to make yourself look better in the eyes of a lender. You “borrow” the asset, maybe a hefty chunk of cash, and after the mortgage closes, you give it back to your partner in crime. Sounds harmless, but it’s a common and serious mortgage scam.

4. Inflated Appraisals

Appraisers have the keys to the kingdom. They state the fair market value of a home. Crooked appraisers can do a couple of things that are illegal: They can undervalue the property so that a buyer gets a “deal,” or more often, they overstate the value of the property. The goal is to help a buyer or seller, or a homeowner planning to refinance or tap home equity.

5. False Identity/Identity Theft

Identity theft is an epidemic. According to the Federal Trade Commission, in 2022, it received over 1.1 million reports of identity theft.

Scammers use financial information like Social Security numbers, stolen pay stubs, even fake employment verification forms to get a fraudulent mortgage on a property they do not own. If you’ve been a victim, report identity theft as soon as possible.

6. Foreclosure Scams

Talk about kicking somebody when they’re down. Predators seek out those who are in foreclosure or at risk of defaulting on their loan and tell them that they can save their home by transferring the deed or putting the property in the name of an investor. It can sound rational when you’re desperate.

The perpetrator cashes in when they sell the property to an investor or straw borrower, creating equity using a fraudulent appraisal and stealing the seller proceeds or fees paid by the homeowners. The homeowners are typically told that they can pay rent for at least a year and repurchase the property when their credit has improved.

But that’s not how the story goes. The crooks don’t make the mortgage payments, and the property will likely wind up going into foreclosure.

7. Air Loan

This may as well be in a movie, because nothing is real with this — it’s probably the most bizarre of the mortgage fraud schemes. The FBI describes an air loan as a nonexistent property loan where there is usually no collateral. Brokers invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrow. They may establish an office with a bank of phones used as the fake employer, appraiser, credit agency, and so on, to deceive creditors who attempt to verify information on loan applications.

8. Inaccurate Income

A lie can be what you leave out as much as what you say. Given the nature of how self-employed people file taxes, some do not report their full income on their taxes. When it comes to a “stated income” loan, a borrower claims a certain amount of income, and an underwriter makes a decision based on that figure to give them a loan or not.

If the borrower tells a little white lie about their income, it’s not little at all. It’s mortgage fraud. One way lenders try to ensure the information a borrower provides is accurate is to request a letter of explanation about anything that might be concerning in a borrower’s application. This is also why a lender asks for bank statements for a mortgage application, and may ask for extra documentation if you are self-employed.

9. Repaying Gift Money

You can receive part of a down payment for a home, but the gift is not to be repaid. In fact, when you plan to use gift funds, you’ll need to provide a gift letter that proves the money is not a loan to be repaid. You may also be asked to provide documentation to prove the transfer of the gift into your bank account. This may include asking the donor for a copy of their check or bank account statement.

If that gift is to be repaid, it is mortgage fraud. It can also put your loan qualification at risk, as all loans need to be factored into your debt-to-income ratio.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

Why Is Mortgage Fraud Committed?

Borrowers who know they are not really mortgage-ready — perhaps because of a poor credit history, a low credit score, or a nothing-to-brag-about salary that would likely get them the thumbs down from a lender — may be driven to try to enhance their chances of getting a loan, even by illegal means.

As for industry professionals, be it appraisers, real estate agents, mortgage brokers, or anyone who has a role in the home buying and selling process, they could be motivated by the almighty dollar. If they can look the other way to get the transaction done, or manipulate facts so they get their piece of the action, they may do so. (Home improvement scams are widespread too, so exercise caution when commissioning work on your home as well.)

Avoiding and Preventing Mortgage Fraud

When it comes to buying or selling a house, there are a lot of moving parts and many cooks in the kitchen. It’s a good idea to, above all, be truthful about everything, and if anyone along the way seems to be pushing you in any other direction, you could pay dearly for taking that bad advice.

You can play the game straight, but what about all the others involved in the process? It’s smart to get referrals for companies and real estate and mortgage pros that you’ll be working with, and to check state and local licenses. Visit a home loan help center to familiarize yourself with the ins and outs of getting a mortgage before you start your home search.

Once you’ve found a home you love and begin the buying process, do your homework to ensure your property evaluation, or appraisal, is on target. It might be helpful to look at other homes that are similar to see what they have sold for, and recent tax assessments of nearby homes.

Guard your John Hancock as well. Be careful what you sign, and never sign a blank document or one containing blank lines.

Once you’re a homeowner, never sign over the house deed “temporarily.” This could be a set-up. Someone may be asking you to sign over your house deed as part of a scheme to avoid foreclosure. Know that chances are you’ll lose your house permanently.

Can You Accidentally Commit Mortgage Fraud?

Even if you didn’t set out to perpetrate a mortgage scam, you could commit fraud unwittingly by signing fraudulent documents presented by a clever thief, by guessing at your assets and writing numbers into your application without checking them, or by borrowing money for a down payment without disclosing the loan.

Victims of Mortgage Fraud

What do you do if you’re the victim of mortgage fraud? Your local police department may take a report. Your state attorney general’s office may be another good resource. The FBI, however, is the agency that handles most mortgage fraud investigations. You can go to tips.fbi.gov to report a crime. Other federal agencies also investigate mortgage fraud, but the FBI is likely the best first option.

The Takeaway

Mortgage fraud isn’t rare, and both industry insiders and borrowers can be involved. It’s smart to approach the process of getting a home loan with care. Do your homework to find a loan provider you trust and read everything before you sign.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is considered mortgage fraud?

Intentionally providing false information or omitting information during the mortgage loan application process is considered mortgage fraud.

What are common mortgage fraud tactics?

Mortgage fraud takes many different shapes but common tactics include borrowers falsely inflating assets or income; those involved in the mortgage lending process inventing fake borrowers; or appraisers artificially inflating property values.

What is the typical sentence for mortgage fraud?

The average sentence for mortgage fraud is 14 months, but prison time can extend to 30 years. Fines (of up to $1 million) and the payment of restitution — repaying the money that resulted from the fraud — are also usually part of the sentence.


Photo credit: iStock/fizkes

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.


*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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A Guide to How Counter Offers Work in Real Estate

Most people aren’t prepared for the wild and sometimes-bumpy ride of negotiating counter offers in real estate, even though the experience is remarkably common.

Home sellers are free to make a counter offer if they’re dissatisfied with a buyer’s initial bid. Usually, that counter offer indicates they’ve accepted the buyer’s offer subject to certain changes, including updates to contingencies, closing date, and sales price.

Counter offers are a fairly standard part of the home-buying process, but the rules of engagement might not seem remotely intuitive at the time. To help understand how counter offers in real estate work, what the typical negotiating steps look like, and how to counter offer on real estate, here’s a little guide you can cram with.

Common Reasons for Counter Offers

From the beginning of the home-buying process, unexpected twists and turns can arise. After sifting through hundreds of listings, attending several showings, and putting an offer in on a dream home (or two, or three), the deal can be far from done.

There are many reasons why it takes time to buy a house, and counter offers can certainly be one of them. Counter offers in real estate can come into play in these scenarios:

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


A Change in Sales Price

One of the most commonly contested items in the purchase of a house is the sales price. If buyers come in lower than the asking price with their offer, sellers might counter with the original asking price (if they’re unwilling to negotiate) or somewhere between the asking price and the offer.

Recommended: What to Know About Getting Preapproved for a Home Loan

Requesting a Later Closing Date

Sometimes sellers simply need more time to vacate the premises. Whether they have unfinished business or unexpected plans, they may present a counter offer that extends the escrow period to allow them more time to move out.

Increasing the Earnest Money Deposit

In some cases, the seller could up the ante by increasing the earnest, or “good faith,” money deposit the buyer submits with the offer. Earnest money deposits are typically between 1% and 3% of the purchase price, but in a hot market, there’s a chance the seller could ask for more to ensure the buyer is serious about purchasing the property.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

The Removal of Certain Contingencies

Contingency clauses are actions or conditions that must be met before a real estate contract becomes binding. If you’re a first-time homebuyer (or even if you aren’t) it’s wise to brush up on these terms. Common contingencies, which most sellers will see as standard in a real estate offer, are:

•   An appraisal contingency to protect buyers if the property is valued lower than the amount they offer.

•   A financing contingency that allows buyers adequate time to get a mortgage or other financing to purchase the property.

•   An inspection contingency that ensures buyers have the right to a thorough inspection of the property within a specified period of time.

Some contingencies, however, are considered less than standard. For example, a home sale contingency grants buyers a set amount of time to sell their existing home so they can finance the new property. Some sellers may find this contingency burdensome, particularly in a hot market, so they could make a counter offer that removes the home sale contingency. They can also counter with a “kick-out clause” that gives a real estate agent the right to keep showing the house while buyers attempt to sell their existing home.

Requesting Repairs

If a home inspection reveals necessary repairs or renovations to the property, the buyer could submit a counter offer to negotiate a lower price or ask the seller to complete the repairs before closing.

Deciding Who Covers Closing Costs

In a buyer’s market, it might be possible to negotiate the house price or some or all of the closing costs to be paid by the seller. These costs include appraisal fees, settlement fees, title policies, recording fees, land surveys, and transfer tax. Many buyers are surprised by how expensive closing costs are, but in particularly hot markets with multiple offers, sellers can counter with a simple “no” to indicate they won’t be covering those costs for the buyer.

How Do Counter Offers Work in Real Estate

While real estate counter offers vary depending on the market, the seller’s unique circumstances, and other standalone factors, there are some fairly standard parameters to the counter offer process:

What’s a ‘Normal’ Number of Counter Offers?

There’s no legal limit to the number of counter offers in real estate transactions. Initial offers, counter offers, and subsequent counter offers could ping pong back and forth for weeks or more.

Knowing the local real estate market trends can be key here. In a buyer’s market with plenty of houses for sale, sellers might want to be cautious about submitting an unnecessary number of counter offers.

Similarly, in a seller’s market where inventory is low and buyer competition is high, buyers might want to limit the number of counter offers they push back at the seller.

Can a Seller Make Simultaneous Counter Offers?

Depending on the state where the real estate transaction takes place, a seller may or may not be able to make counter offers to more than one buyer. That said, most real estate agents advise against multiple simultaneous counter offers, as it could end up in two legally binding contracts for the seller.

How Long Does the Process Take?

Number of counter offers aside, homebuyers can expect a closing to take about 45 days, on average. But how long it takes still varies from buyer to buyer, with factors like whether they’re paying cash, how long it takes them to find an inspector, and if the house appraises at a lower value, affecting the overall timeline.


💡 Quick Tip: You deserve a more zen mortgage. SoFi Mortgage Loan Officers are dedicated to closing your loan on-time — backed by a $5,000 guarantee offer.‡

How to Counter Offer in Real Estate

To some degree there’s such a thing as real estate counter offer etiquette. Here are a few things to consider when engaging in the counter offer process:

Have a Comprehensive Picture of Costs

For buyers, having an accurate handle on what it will cost to buy the house is essential for negotiating counter offers discerningly.

Closing costs can be one of the most negotiated items between buyers and sellers and add up to as much as 5% of the mortgage amount. Having a firm grasp of how much to expect in closing costs can help guide the counter offer process.

Setting realistic expectations for the monthly housing payment (including the mortgage principal and interest, insurance, maintenance, any homeowners association fees, and other costs) and what they can afford to pay as a lump sum at closing can help shape this picture for the buyer.

A mortgage calculator helps buyers break down the cost of purchasing a home. Understanding the various factors that might affect your home loan costs is important, too.

Recommended: The Cost of Living by State

Go In With a Strong Offer

A “strong” offer is backed by data that defines what’s happening in the market, and research (with the help of an agent) around what’s considered “fair market value.” Being preapproved for a home loan will make you an attractive candidate from the seller’s point of view.

Coming in at 15% or more under the fair market value is generally considered a “lowball” offer and can start buyers off on the wrong foot. In some cases, sellers might skip right over anything that isn’t considered a strong offer.

Know What Can Be Negotiated

One of the first steps in making a real estate counter offer is knowing what can be negotiated:

•   Possession date. Giving the sellers more time to move out could mean an exchange for a condition the buyer desires. Buyers hoping to move in sooner might make a counter offer requesting an earlier possession date.

•   Personal property. Some of the seller’s personal property like furniture, window treatments, artwork, or gardening tools could be negotiated into the contract in a counter offer.

•   Home warranty. Older houses can come with their own unique sets of systems and appliances, so buyers might make a counter offer asking the sellers to cover the cost of a one- to two-year home warranty ($350 to $600 annually, on average) if unexpected repairs need to be made after move-in.

•   Earnest money deposit. Whether buyers are trying to reduce their risk of something going wrong during closing or strengthen their offer, they can negotiate a lower or higher earnest money deposit with a counter offer.

Be Timely and Responsive

Real estate offers and counter offers often come with a set expiration date, so time is usually of the essence. Forty-eight hours is a standard acceptance window in many real estate markets, but in hot markets offers might expire within 24 hours or less.

Some sellers take this concept to a whole new level, setting stringent requirements around offer acceptance. It’s up to buyers to determine whether or not they’re willing to reply quickly enough to meet the sellers’ time demands or risk losing the deal.

Try Not to Take Things Personally

It might not feel like “all’s fair in buying and selling a home” since it’s one of the biggest financial transactions many will make in their lifetime. But buyers and sellers shouldn’t be surprised if it comes with a little bit of literal give and take.

And while it might seem like a personal affront to have a real estate offer rejected, it’s possible (and even likely) that the seller has multiple offers or was simply able to strike a better deal.

When push comes to shove and purchase comes to close, buying a house is a matter of business, no matter how personal the home-buying journey can feel.

The Takeaway

Real estate offers and counter offers are a common form of business negotiation, and a first step in making a counter offer is knowing what can be negotiated. Being cognizant of counter offer etiquette can be helpful.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

How do you handle counter offers in real estate?

Counter offers are an expected part of the negotiation process so approach any counter offer calmly. Know your goal for the overall cost of your home purchase or sale, and what levers you can pull to get there (lower/higher price? Change in contingencies or closing timeline?). Come back with your strongest counter offer but always be prepared to walk away.

What are the steps in a counter offer?

Understand the complete picture of costs in the transaction. Go in with your strongest counter offer, in a timely fashion, and don’t take it personally if you don’t get 100 percent of what you want from the deal.

What is the general rule of counter offers?

The number one rule of counter offers, whether you’re buying or selling, is to know what total price you can ultimately afford. Keep calm and negotiate on, but don’t get emotionally involved — you may need to walk away at any time.


*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Solo 401(k) vs SEP IRA: Key Differences and Considerations

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

Self-employment has its perks, but an employer-sponsored retirement plan isn’t one of them. Opening a solo 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP IRA) allows the self-employed to save for retirement while enjoying some tax advantages.

So, which is better for you? The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks.

Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs.

Key Points

•   Solo 401(k) allows tax-deductible contributions, employer contributions, employee contributions, and offers the option for Roth contributions and catch-up contributions.

•   SEP IRA allows tax-deductible contributions, employer contributions, but does not allow employee contributions, Roth contributions, catch-up contributions, or loans.

•   Withdrawals from traditional solo 401(k) plans and SEP IRAs are taxed in retirement.

•   Solo 401(k) plans allow loans, while SEP IRAs do not.

•   Solo 401(k) plans offer more flexibility and options compared to SEP IRAs.

Understanding the Basics

A solo 401(k) is similar to a traditional 401(k), in terms of annual contribution limits and tax treatment. A SEP IRA follows the same tax rules as traditional IRAs. SEP IRAs, however, typically allow a higher annual contribution limit than a regular IRA.

What Is a Solo 401(k)?

A solo 401(k) covers a business owner who has no employees or employs only their spouse. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis.

These plans follow the same IRS rules and requirements as any other 401(k). There are specific solo 401(k) contribution limits to follow, along with rules regarding withdrawals and taxation. Regulations also govern when you can take a loan from a solo 401(k) plan.

A number of online brokerages offer solo 401(k) plans for self-employed individuals, including those who freelance or perform gig work. You can open a retirement account online and start investing, no employer other than yourself needed.

If you use a solo 401(k) to save for retirement, you’ll also need to follow some reporting requirements. Generally, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if it has $250,000 or more in assets at the end of the year.

What Is a SEP IRA?

A SEP IRA is another option to consider if you’re looking for retirement plans for the self-employed. This tax-advantaged plan is available to any size business, including sole proprietorships with no employees. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. They do, however, allow you to contribute more money toward retirement each year above the standard traditional IRA contribution limit. That means you could enjoy a bigger tax break when it’s time to deduct contributions.

If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. SEP IRA contribution limits are, for the most part, the same for both employers and employees. If you’re interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Diving Deeper: Pros and Cons of Each Plan

As you debate between a solo 401(k) vs. a SEP IRA as ways to build wealth for retirement, it’s helpful to learn more about how these plans work, including their benefits and drawbacks.

Advantages of Solo 401(k)s

In terms of differences, there are some things that set solo 401(k) plans apart from SEP IRAs.

With a solo 401(k), you can choose a traditional or Roth. You can deduct your contributions in the year you make them with a traditional solo 401(k), but you’ll pay taxes on your distributions in retirement. With a Roth solo 401(k) you pay taxes on your contributions in the year you make them, and in retirement, your distributions are tax free. You can choose the plan that gives you the best tax advantage.

Another benefit of a solo 401(k) is that those age 50 and older can make catch-up contributions to this plan. In addition, you may be able to take a loan from a solo 401(k) if the plan permits it.

Advantages of SEP IRAs

One of the benefits of a SEP IRA is that contributions are tax deductible and you can make them at any time until your taxes are due in mid-April of the following year.

The plan is also easy to set up and maintain.

If you have employees, you can establish a SEP IRA for yourself as well as your eligible employees. You can then make retirement plan contributions to a SEP IRA on your employees’ behalf. (All contributions to a SEP are made by the employer only, though employees own their accounts.)

SEP IRA contribution limits are, for the most part, the same for both employers and employees. This means that you need to make the same percentage of contribution for each employee that you make for yourself. That means if you contribute 15% of your compensation for yourself, you must contribute 15% of each employee’s compensation (subject to contribution limits).

A SEP IRA also offers flexibility. You don’t have to contribute to it every year.

However, under SEP IRA rules, no catch-up contributions are allowed. There’s no Roth option with a SEP IRA either.

Eligibility and Contribution Limits

Here’s what you need to know about who is eligible for a SEP IRA vs. a Solo 401(k), along with the contribution limits for both plans for 2024 and 2025.

Who Qualifies for a Solo 401(k) or SEP IRA?

Self-employed individuals and business owners with no employees (aside from their spouse) can open and contribute to a solo 401(k). There are no income restrictions on these plans.

SEP IRAs are available to self-employed individuals or business owners with employees. A SEP IRA might be best for those with just a few employees because IRS rules dictate that if you have one of these plans, you must contribute to a SEP IRA on behalf of your eligible employees (to be eligible, the employees must be 21 or older, they must have worked for you for three of the past five years, and they must have earned at least $750 in the tax year).

Plus, the amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

Contribution Comparison

With a solo 401(k), there are rules regarding contributions, including contribution limits. For 2024, you can contribute up to $69,000, plus an additional catch-up contribution of $7,500 for those age 50 and older. In 2025, you can contribute up to $70,000, plus an extra catch-up contribution of $7,500 for those age 50 and older. Also in 2025, those aged 60 to 63 may contribute an additional catch-up of $11,250 instead of $7,500, thanks to SECURE 2.0.

For the purposes of a solo 401(k) you play two roles — employer and employee. As an employee, you can contribute the lesser of 100% of your compensation or up to $23,000 in 2024 and up to $23,500 in 2025. If you’re 50 or older, you can contribute the $7,500 catch-up contribution in 2024 and 2025, and if you’re aged 60 to 63, in 2025 you may contribute an additional $11,250 instead of $7,500. As an employer, you can make an additional contribution of 25% of your compensation (up to $345,000 in 2024 and up to $350,000 in 2025) or net self-employment income.

The contribution limits for a SEP IRA are the lesser of 25% of your compensation or $69,000 in 2024 and $70,000 in 2025. As mentioned earlier, there are no catch-up contributions with this plan.

And remember, per the IRS, if you have a SEP IRA, you must contribute to the plan on behalf of your eligible employees. The amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Key Differences That Could Influence Your Decision

When you’re deciding between a solo 401(k) vs. a SEP IRA, consider the differences between the two plans carefully. These differences include:

Roth Options and Tax Benefits

With a solo 401(k), you can choose between a traditional and Roth solo 401(k), depending on which option’s tax benefits make the most sense for you. If you expect to be in a higher tax bracket when you retire, a Roth may be more advantageous since you can pay taxes on your contributions upfront and get distributions tax-free in retirement.

On the other hand, if you anticipate being in a lower tax bracket at retirement, a traditional solo 401(k) that lets you take deductions on your contributions now and pay tax on distributions in retirement could be your best option.

Loan Options and Investment Flexibility

You may also be able to take a loan from a solo 401(k) if your plan permits it. Solo 401(k) loans follow the same rules as traditional 401(k) loans.

If you need to take money from a SEP IRA before age 59 ½, however, you may pay an early withdrawal penalty and owe income tax on the withdrawal.

Both solo 401(k)s and SEP IRA offer more investment options than workplace 401(k)s. So you can choose the investment options that best suit your needs.

The Impact of Having Employees

Whether you have employees or not will help determine which type of plan is best for you.

A solo 401(k) is designed for business owners with no employees except for a spouse.

A SEP IRA is for those who are self-employed or small business owners. A SEP IRA may be best for those who have just a few employees since, as discussed above, you must contribute to a SEP IRA on behalf of all eligible employees and you must contribute the same percentage of compensation as you contribute for yourself.

The Financial Implications for Your Business

The plan you choose, solo 401(k) vs. SEP IRA, does have financial and tax implications that you’ll want to consider carefully. Here’s a quick comparison of the two plans.

Solo 401(k) vs SEP IRA at a Glance

Both solo 401(k) plans and SEP IRAs make it possible to save for retirement as a self-employed person or business owner when you don’t have access to an employer’s 401(k). And both can potentially offer a tax break if you’re able to deduct contributions each year.

Here’s a rundown of the main differences between a 401(k) vs. SEP IRA.

Solo 401(k)

SEP IRA

Tax-Deductible Contributions Yes, for traditional solo 401(k) plans Yes
Employer Contributions Allowed Yes Yes
Employee Contributions Allowed Yes No
Withdrawals Taxed in Retirement Yes, for traditional solo 401(k) plans Yes
Roth Contributions Allowed Yes No
Catch-Up Contributions Allowed Yes No
Loans Allowed Yes No

How These Plans Affect Your Bottom Line

Both solo 401(k)s and SEP IRAs are tax-advantaged accounts that can help you save for retirement. With a SEP IRA, contributions are tax deductible, including contributions made on employees’ behalf, which offers a tax advantage. Solo 401(k)s give you the option of choosing a traditional or Roth option so that you can pay tax on your contributions upfront and not in retirement (traditional), or defer them until you retire (Roth).

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

An important part of planning for your retirement is understanding your long-term goals. Whether you choose to open a solo 401(k) or make SEP IRA contributions can depend on how your business is structured, how much you want to save for retirement, and what kind of tax advantages you hope to enjoy along the way.

When to Choose a Solo 401(k)

If you’re self-employed and have no employees (or if your only employee is your spouse), you may want to consider a solo 401(k). A solo 401(k) could allow you to save more for retirement on a tax-advantaged basis compared to a SEP IRA. A solo 401(k) allows catch-up contributions if you are 50 or older, and you can also take loans from a solo 401(k).

Just be aware that a solo 401(k) can be more work to set up and maintain than a SEP IRA.

When to Choose a SEP IRA

If you’re looking for a plan that’s easy to set up and maintain, a SEP IRA may be right for you. And if you have a few employees, a SEP IRA can be used to cover them as well as your spouse. However, you will need to cover the same percentage of contribution for your employees as you do for yourself.

Remember that a SEP IRA does not allow catch-up contributions, nor can you take loans from it.

Step-by-Step Guide to Opening Your Account

You can typically set up a SEP IRA with any financial institution that offers other retirement plans, including an online bank or brokerage. The institution you choose will guide you through the set-up process and it’s generally quick and easy.

Once you establish and fund your account, you can choose the investment options that best suit your needs and those of any eligible employees you may have. You will need to set up an account for each of these employees.

To open a Solo 401(k), you’ll need an Employee Identification Number (EIN). You can get an EIN through the IRS website. Once you have an EIN, you can choose the financial institution you want to work with, typically a brokerage or online brokerage. Next, you’ll fill out the necessary paperwork, and once the account is open you’ll fund it. You can do this through direct deposit or a check. Then you can set up your contributions.

Additional Considerations for Retirement Planning

Besides choosing a SEP IRA or a solo 401(k), there are a few other factors to consider when planning for retirement. They include:

Rollover Process

At some point, you may want to roll over whichever retirement plan you choose — or roll assets from another retirement plan into your current plan. A SEP IRA allows for either option. You can generally roll a SEP IRA into another IRA or other qualified plan, although there may be some restrictions depending on the type of plan it is. You can also roll assets from another retirement plan you have into your SEP.

A solo 401(k) can also be set up to allow rollovers. You can roll other retirement accounts, including a traditional 401(k) or a SEP IRA, into your solo 401(k). You can also roll a solo 401(k) into a traditional 401(k), as long as that plan allows rollovers.

Can You have Both a SEP IRA and a Solo 401(k)?

It is possible to have both a SEP IRA and a solo 401(k). However, how much you can contribute to them depends on certain factors, including how your SEP was set up. In general, when you contribute to both plans at the same time, there is a limit to how much you can contribute. Generally, your total contributions to both are aggregated and cannot exceed more than $69,000 in 2024 and $70,000 in 2025.

Preparing for Retirement Beyond Plans

Choosing retirement plans is just one important step in laying the groundwork for your future. You should also figure out at what age you can retire, how much money you’ll need for retirement, and the typical retirement expenses you should be ready for.

Working on building your retirement savings is an important goal. In addition to opening and contributing to retirement plans, other smart strategies include creating a budget and sticking to it, paying down any debt you have, and simplifying your lifestyle and cutting unnecessary spending. You may even want to consider getting a side hustle to bring in extra income.

The Takeaway

Saving for retirement is something that you can’t afford to put off. And the sooner you start, the better so that your money has time to grow. Whether you choose a solo 401(k), SEP IRA, or another savings plan, it’s important to take the first step toward building retirement wealth.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.


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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What to Know About Getting Preapproved for a Home Loan

Getting mortgage preapproval can give you an edge in the home-buying process, especially when the housing market is tight. A mortgage preapproval from a lender lets sellers know that you have tentatively been approved for a specific loan type and amount. Not only does this show that you’re a serious home shopper, it also helps give you a good sense of your budget as you go house-hunting.

Here, you’ll learn the ins and outs of how to get preapproved for a home loan, including:

•   What is mortgage preapproval?

•   How do mortgage preapproval and prequalification compare?

•   What are the pros and cons of mortgage preapproval?

•   How can you improve your chances of getting preapproved for a mortgage loan?

•   What can you do if you aren’t preapproved for a mortgage?

Key Points

•   Mortgage pre-approval is an important step in the homebuying process that helps determine how much you can afford.

•   Pre-approval involves submitting financial documents and undergoing a credit check to assess your eligibility for a mortgage.

•   It’s recommended to get pre-approved before house hunting to have a clear budget and show sellers you’re a serious buyer.

•   Pre-approval letters typically have an expiration date and may require updating if your financial situation changes.

•   Keep in mind that pre-approval is not a guarantee of a loan, and final approval will depend on additional factors.

What Is Mortgage Preapproval?

Mortgage preapproval involves a thorough review of your credit and financial history. If you look like a good candidate for a mortgage, a lender will issue a letter stating that you qualify for a loan of a certain loan amount and at a certain interest rate. The letter is an offer, but not a commitment, to lend you a specific amount. It’s good for up to 90 days, depending on the lender.

You’ll want to shop for homes within the price range of your preapproved mortgage. Armed with your preapproval for a home loan, you can show sellers that you are a serious buyer with the means to purchase a property. In the eyes of the seller, preapproval can often push you ahead of other potential buyers who have not yet been approved for a mortgage and make it easier to compete when there are multiple offers on a house.

Once you find a house that you want to buy, you can make an offer immediately based on the loan amount for which you are preapproved. And if the seller accepts, it will be time to finalize your mortgage application. At this point, a loan underwriter will review your application and conduct other due diligence measures, such as having the house appraised to make sure it is valued at the price it’s selling for. If all goes well, the lender will issue another letter called a commitment letter, which officially seals the deal on your loan, and you can schedule a closing date.

When Should I Get Preapproved for a Home Loan?

Preapproval typically lasts for 90 days, at most, so you want to seek it when you are actively in the market for a new home. Maybe you’ve done some initial online research into available properties. Hopefully, you’ve also had a good look at your finances and thought about how much you have available to spend on a down payment as well as what amount of monthly mortgage payments you can afford long-term. It takes around 10 days after you submit a request to be preapproved, so factor that timing into your house search as well.

Mortgage Preapproval vs. Prequalification

If you are house hunting, you will likely hear two different terms regarding early mortgage moves: prequalification vs. preapproval. Prequalification is a simple, less involved view of your financial qualifications for a mortgage. Preapproval for a home loan is a more in-depth review of your finances and an indicator that your loan application will likely move forward smoothly. Each has its advantages, and its moment.

Mortgage Prequalification

Getting prequalified for a home loan involves a review of a few financial details — usually self-reported — such as income, assets, and debt. The lender will then estimate how much of a mortgage you can afford.

Pros of Mortgage Prequalification

•   It’s fast. The process can often be done in minutes, by phone or online.

•   You’ll zero in on house prices. Prequalifying for a home loan quickly gives you an idea of what your monthly payment might be and how much house you can afford.

•   You can shop around. You can prequalify with multiple lenders to see what types of terms and interest rates they offer.

•   It’s easy on your credit score. Prequalification will not affect your credit score because it only requires a “soft inquiry” into your credit record.

Cons of Mortgage Prequalification

•   It’s no guarantee. Because it is an unverified, high-level look at your finances, prequalification doesn’t ensure that you will actually qualify for a mortgage.

•   It won’t help you bargain. Being prequalified won’t help you negotiate a lower price with a seller or compete against other bidders in a competitive market.

Mortgage Preapproval

Requesting a mortgage preapproval is a more complicated process than getting prequalified. You’ll have to fill out an application with your chosen lender and agree to a credit check. The credit check will be a “hard pull” which will ding your credit score by a few points. You’ll also provide information about your income and assets. The evaluation process can take 10 days or more. Again, preapproval doesn’t mean it’s a done deal that you’ll get the loan, but it is a solid indication of your financial situation and ability to purchase a home.

There are a number of advantages to getting preapproval for a home loan, especially if you’re shopping in a fast-moving market.

Pros of Mortgage Preapproval:

•   It gives you an edge. Sellers will see that you are a serious buyer and have assurance that your financing won’t fall through and sink the deal.

•   It helps you get loan shopping done. When you’ve found your dream house, you don’t want to delay putting in an offer because you have to spend time getting your documents together and pursuing a loan. Going through the preapproval process helps you take care of these details before you’re in a fast-moving market.

Cons of Mortgage Preapproval:

•   A mortgage preapproval expires. How long does a mortgage preapproval last? As noted above, the letter is only good for a certain period of time, usually 90 days, so you’ll want to make sure you’re seriously ready to start shopping once you have your mortgage preapproval in hand.

•   The application is time-consuming. You’ll need to provide a lot of documentation to get a mortgage preapproval and agree to a hard credit inquiry, which can drag down your credit score, though usually only by a bit.

•   Nothing is guaranteed. Even though your home loan preapproval letter likely has details on your loan amount and type, it is only tentative approval — you still can’t be 100% sure that you will get the loan.

Here are the basic comparison points of prequalification vs. preapproval:

The Difference Between Prequalification and Preapproval

Prequalification Preapproval
Process

•   Simple process that takes only a few minutes online or by phone.

•   You’ll fill out a thorough application and provide documents. The process can take 10 days or more.

Required materials

•   High-level financial details you provide; sometimes a “soft” credit check which won’t impact your rating.

•   Full application and supporting financial documents, as well as a “hard pull” credit check that will ding your rating.

Benefits

•   Can give you an idea of what you can afford as you start the process.

•   Lets you compare lenders and rates.

•   Tentatively approves you for a loan amount and type.

•   Can provide leverage when you’re ready to get serious about buying.

Drawbacks

•   Won’t give you an advantage in negotiations or a bidding war.

•   It’s no guarantee you’ll get a mortgage.

•   Preapproval is good for 90 days so your home-finding timeline may be affected.

•   Does not guarantee you’ll get the loan.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


Steps to Get Preapproved for a Home Loan

Getting preapproved for a home loan will take some time, so it’s good to get the process started before you are ready to make an offer on a home. Here are some important steps along the way.

Check Your Credit Score

If you’ve established a credit history, a first step before applying for a mortgage is to check your credit reports, which are a history of your credit compiled from sources like banks, credit card companies, collection agencies, and the government.

The information is collected by the three main credit reporting bureaus: TransUnion®, Equifax®, and Experian®. You’ll want to make sure that the information on your credit reports is correct. Ordering the reports is free once a year through AnnualCreditReport.com .

If you find any mistakes in your credit report, contact the credit reporting agencies immediately to let them know. You don’t want any incorrect information weighing down your credit score, putting your chances for preapproval at risk.

The free credit reports provided by the nationwide credit reporting agencies do not include your credit score, a number typically between 300 and 850. You can purchase your score directly from the credit reporting agencies, or from FICO®. Your credit card company also may provide your credit score for free, or you could try a money tracker app that updates your credit score weekly and tracks your spending at no cost.

Calculate Your Potential Mortgage

To help with the prequalification and preapproval process, use the mortgage calculator below to see what your estimated monthly mortgage would be based on down payment, interest rate, and loan terms.

Gather Documentation

Your credit score is only one of many factors a potential lender will consider when deciding on your mortgage qualification. So collect the many other documents you will need to paint a full picture of your financial life. Ask the lender what is needed, specifically. The list will likely include:

•   Recent pay stubs

•   Recent bank and investment account statements

•   Two years of tax returns and/or W2s, possibly more if you are self-employed

•   Verification of alimony or child support payments received and the court documents spelling out the terms of the payments

•   Social Security award letter, if you derive income from Social Security

•   Certificate of Eligibility from the VA, if you are applying for a VA loan

•   Gift letter documenting any money you are receiving from family or other sources toward a down payment

Receive Your Mortgage Preapproval Letter

Your first instinct when you receive preapproval will likely be to jump for joy. Next, take a moment to ask the lender if they made any assumptions about your finances in order to issue the letter, or if they flagged anything that could lead to you being denied a mortgage later on, or that could increase your costs. Doing this could help you head off future problems that might scuttle a deal.

Upping Your Odds of Mortgage Preapproval

There are a number of steps you can take to increase your chances of preapproval or to increase the amount your lender may approve you for.

Build Your Credit

When you apply for any type of loan, lenders want to see that you have a history of properly managing your debt before offering you credit themselves.

You can build your credit history by opening and using a credit card and paying your bills on time. Or you could consider having regular payments, such as your rent, tracked and added to your credit score.

Recommended: What Credit Score Is Needed to Buy a House?

Stay on Top of Debt

Your ability to pay your bills on time has a big impact on your credit score. If your budget allows, you should aim to make payments in full.

If you have any debts that are dragging down your credit score — for example, debts that are in collection — it’s smart to work on paying them off first, as this could help build your score.

“Really look at your budget and work your way backwards,” explains Brian Walsh, CFP® at SoFi, on planning for a home mortgage.

Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages

Watch Your Debt-to-Income Ratio

Your debt-to-income ratio is your monthly debt payments divided by your monthly gross income. If you have $1,000 a month in debt payments and make $5,000 a month, your debt-to-income (DTI) ratio is $1,000 divided by $5,000, or 20%.

Mortgage lenders typically like to see a DTI ratio of 36% or less. Some may qualify borrowers with a higher DTI, up to 43%. Lenders may assume that borrowers with a high DTI ratio will have a harder time making their mortgage payments.

If you’re seeking preapproval for a mortgage, it may be beneficial to keep the ratio in check by avoiding large purchases. For example, you may want to hold off on buying a new car until you’ve been preapproved.

Prove Consistent Income

Your lender will want to know that you have enough money coming in each month to cover a potential mortgage payment, so the lender will likely want proof of consistent income for at least two years (that means pay stubs, W-2s, etc.).

For some potential borrowers, such as freelancers, this may be a tricky process since they may have income from various sources. Keep all pay stubs, tax returns, and other proof of income, and be prepared to show those to your lender.

What Happens If Your Mortgage Preapproval is Rejected?

Rejection hurts. But if you aren’t preapproved or you aren’t approved for a large enough mortgage to buy the house you want, you also aren’t powerless. You can ask the lender why it said “no.” This will give you an idea about what you might need to work on in order to secure the mortgage you want.

Then you may want to work on the factors that your lender saw as a sticking point to preapproval. You can continue to work to build your credit score, lower your DTI ratio, or save for a higher down payment.

If you’re able to pay more upfront, you will typically lower your monthly mortgage payments. Once you’ve worked to make yourself a better candidate for a mortgage, you can apply for preapproval again.

Dream Home Quiz

The Takeaway

In a competitive market, having a mortgage preapproval letter in hand may give a house hunter an edge. After all, the letter states that the would-be buyer tentatively qualifies for a home loan of a certain amount.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What happens during the preapproval process?

During the mortgage preapproval process you’ll provide lots of background information on your finances. A potential lender will also check your credit score. If the lender feels you’re a suitable candidate for a loan, you’ll receive a letter that you can show a seller to better your chances when making an offer on a home.

Do preapprovals hurt your credit score?

The lender will do a “hard pull” to obtain your credit score prior to a preapproval. This may cause your rating to drop by a few points, but it should rebound quickly if you pay your bills on time.

How far in advance should I get preapproved for a mortgage?

Get preapproved for a mortgage when you have a sense of the housing costs where you are shopping for a home, and you are ready to start looking in earnest.

Which is better preapproval or prequalification?

Prequalification and preapproval each have a place in the homebuying process. Prequalification is helpful when you are trying to get a sense of what you can afford and which lender might offer the best terms. It’s time for preapproval when you are serious about searching for a home and have researched possible lenders.

Is it OK to get multiple preapprovals?

You only need one preapproval, but it is fine to get a few if you want to see what loan amounts and rates you might qualify for. Make all applications within a 45-day window — the time frame during which multiple lenders can check your credit without each check having an additional impact on your score.


*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How to Negotiate House Price as a Buyer

Buyers who learn how to negotiate house prices lay the foundation for a mutually acceptable deal. Whether you’re a first-time homebuyer or not, these strategies to negotiate home prices may help you score a property at the price that works best for you.

Why You Should Negotiate House Prices

While negotiating the price of a home as a buyer can seem intimidating, the benefits often outweigh the fear. For starters, negotiating lets the seller know you’re serious about the home. And if the asking price is over what you feel comfortable with, negotiating can help you see if there is any wiggle room.

A successful negotiation gives you the opportunity to create a concise offer that you’re happy with and that helps you stay within your budget. It feels great to get the house you want without putting yourself in a stressful financial situation.

Things to Know Before Negotiating Home Prices

Know Your Market

The market will dictate how much leverage you have to negotiate a home price. So start by determining whether it’s a hot seller’s market or a buyer’s market.

The power is typically in your hands if the number of homes for sale exceeds the number of willing buyers. Markets can vary from city to city and neighborhood to neighborhood. So check with your real estate professional to be certain what type of market you’re working with.

Know the Value of an Agent

Can you buy a house without a real estate agent? Sure, but it’s not a decision to make lightly.

Besides the fact that real estate agents know what’s reasonable for the current market conditions, they have valuable experience that can help you navigate offers and counteroffers. And because they aren’t emotionally attached to the outcome, they are better set up to get the best deal without making ​​excessive concessions.

But you don’t want to work with just any agent. You want to work with someone who is a buying and selling expert, has connections with other agents in the area, and is knowledgeable about the community you’re interested in.

Got your eye on a house for sale by owner? You can find a real estate agent or go it alone.

Recommended: Finding a Good Real Estate Agent When Buying a House

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


How Much Can You Negotiate on Average?

One of the best ways to get an idea of how much you can negotiate is to research the prices of “comps,” recently sold homes in your target area that are similar to the property you’re trying to buy.

A real estate agent will have access to market trends. But you can obtain the information yourself on sites like Zillow, Realtor.com, Redfin, and Trulia. If you’re moving from out of state, this guide to the cost of living by state can give you a sense of what housing expenses to expect. In a large state such as California, it’s helpful to consider the cost-of-living breakdown for individual cities.

Zillow also lists how long for-sale properties have been on the market, which can give you some insight into how negotiable a list price may be.

Unless you’re in a hot seller’s market, you may be able to offer 10% under the asking price and even ask the seller to pay closing costs or certain other concessions.

How to Negotiate a House Price as a Buyer

Once you have a sense of the market and an agent to help you negotiate, the next step is to get your finances in order so you’ll be in a strong position to negotiate. Sellers are apt to be most enthusiastic about buyers who have been preapproved, as opposed to prequalified, for a mortgage.

While both involve a lender taking a peek at your financial information, such as income, credit history, debts, and assets, preapproval involves an in-depth application and verification process. It’s a great way to send your offer to the front of the pile.

If you already own a home, selling it ahead of time could also put you in a better position to negotiate: It means you won’t have to wait until your home is sold to go forward with the buying process.

This “chain-free” approach requires careful timing and possibly setting up a temporary living space. While it’s not feasible for everyone, it is an option to keep in mind if you’re hoping to increase your odds of success in a competitive market.

Recommended: How Long Does a Mortgage Preapproval Last?

Now it’s time to make a smart offer.

Tips on Negotiating House Prices

Keep Your Cool

From the first time you walk through the home, it’s a good idea not to show all your cards by appearing overeager, even if you’re totally in love with the place. If you come across as desperate for the house, sellers may feel they can expect a higher offer from you.

Don’t be afraid to point out any drawbacks that give you pause, and give yourself time to shop around before you get serious about putting money on the table.

Get an Inspection

Found a property you love? While your mortgage lender might not require a home inspection — and while forgoing one may make your offer more appealing to the seller — it’s probably in your best interests to have one.

Without a home inspection, the only information you have about the house comes from what the seller is able (or willing) to disclose and what you observe during your tour. Home inspections can reveal hidden issues like cracks in the foundation or plumbing problems.

Along with helping you plan for unforeseen repair costs ahead of time, the inspection can also give you leverage to ask the sellers to knock down their price a bit, offer you a credit for closing costs, or fix the problem themselves. Your real estate agent can help you decide how to negotiate the house price after the inspection.

Put Your Offer in Writing

Many experts recommend putting your offer in writing and adding as much detail as possible. That way you avoid any disagreements on what was said and can negotiate on factors beyond price.

When competing against multiple offers on a house, buyers may waive one or all contingencies to sweeten their offer. Contingencies are simply conditions that must be met in order to close the deal.

An appraisal contingency can be an opportunity to negotiate the home price or back out if the property does not appraise at the price in the purchase contract.

A clear title contingency also gives the buyer a way out if liens or disputes are associated with the property.

And it can’t hurt to ask for help with closing costs.

Plead Your Case

In a competitive market, you might also consider adding a personalized letter to your offer. It might sound cheesy, but selling a home can be just as emotionally fraught as buying one. Describing why you love the house or how you imagine your family growing with the property can help your offer stand out from others, even if you aren’t the highest bidder.

Avoid offending a seller with a lowball offer, particularly if you’re negotiating in a seller’s market or purchasing a beloved property that’s been in the family for years. If you do decide to bid around 20 percent under the asking price, make sure you’re willing to walk away.

When it comes time to make an offer, consider not only the list price but closing costs and any repair or renovation expenses.

Knowing When to Walk Away From an Offer

Although you’ll generally hear back on (realistic) offers within a few business days, sellers aren’t legally obligated to respond to your offer at all. Including an expiration date in your offer will give you a firm calendar date on which you’ll know for a fact you didn’t get the home, which means you’ll be able to redirect your efforts.

Purchasing a home can take a long time. There’s no reason to waste your energy when it’s a moot point.

A seller who responds to your offer but who isn’t inclined to move on the price of the house might be willing to instead make repairs that are needed and that are identified during the inspection of the property. And consider asking the seller to throw in items like furniture or play equipment that they might be planning to take with them. If they decline and you still don’t feel good about the price, it’s time to walk away.

The Takeaway

Negotiation goes on in love and war, in a salary decision, with parents and toddlers, and in real estate. If you’re a buyer, the more you know about negotiating home prices, the better.

As important as it is to shop around for the right home — and negotiate for the right price — it’s also important to find the right home mortgage loan. SoFi offers competitive fixed-rate mortgage loans, and qualified buyers can put down as little as 3%.

Find your rate on a SoFi Mortgage Loan in just minutes.

FAQ

How do you politely ask for a lower price?

Rely on your real estate agent to help you determine a good offer price. Then consider writing a personal letter to accompany the offer, addressing the seller by name if possible and conveying, in a friendly tone, a sincere message about what you like about the house or how you can imagine your family living there.

How much can you negotiate when buying a house?

How much you can negotiate depends on how “hot” the market is. In a competitive seller’s market you may not be able to negotiate at all. Rely on your real estate agent to guide you. A property that has been on the market for a long time may provide more opportunity for negotiation.

What is not a smart way to negotiate when buying a home?

Avoid making a very low initial offer — you risk offending the seller. And don’t criticize the seller’s taste by, say, pointing out that the kitchen decor isn’t to your liking. Finally, if you are preapproved for a mortgage that is greater than your offer price, don’t tip your hand; instead, ask your lender to tailor the preapproval letter to the amount you are offering.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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